* Pound nears 6-month low following sizeable overnight drop
* Fed rate cut prospects keep dollar/yen under pressure
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh (Adds details and quotes, updates prices)
By Shinichi Saoshiro
TOKYO, July 16 (Reuters) – The pound struggled near a six-month low against the dollar on Tuesday, hampered by persistent worries over Brexit that, in turn, weighed on the euro.
The dollar fought for traction against the yen as the prospect of a Federal Reserve interest rate cut later in the month continued to keep the greenback on the defensive.
The pound was a shade lower at $1.2515 following an overnight loss of 0.5%. A slip below $1.2439 would take sterling to its lowest since early January.
The euro was little changed at $1.1260 after shedding 0.1% the previous day, constrained by expectations for a dovish European Central Bank meeting next week.
Sterling was under pressure as investors were nervous about the prospect of eurosceptic Boris Johnson winning the Conservative party leadership contest and becoming the next British prime minister as early as the end of this month.
Poor economic data and signals from the Bank of England that it could cut interest rates instead of raising them as previously expected have also hit the pound.
“The euro has been weighed by the long struggling pound, which in turn is likely to suffer from Brexit-related woes until the Conservative party leader is decided next week,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.
The dollar was little changed at 107.960 yen.
The U.S. currency rose to a six-week high of 108.990 yen last week but slid after Federal Reserve Chairman Jerome Powell set the stage for a rate cut later this month by highlighting uncertainties facing the world’s largest economy.
The dollar lost further ground against the yen towards the end of last week after Chicago Fed President Charles Evans said on Friday that “a couple” of rate cuts were needed to boost inflation.
“Dollar/yen has strengthened its correlation with U.S. yields since mid-May, rather than move in step with equity prices,” said Daisuke Karakama, chief market economist at Mizuho Bank.
“Prior expectations that higher equities would weaken the yen held by some market participants have been dashed completely.”
The prospect of the Fed easing monetary policy has been a boon to equities, with Wall Street shares advancing to record highs over the past week.
The yen, a perceived safe haven, has often depreciated when stronger investor risk appetite has boosted equities. But the correlation has weakened in the face of falling U.S. yields, which has seen the 10-year yield decline to near three-year lows this month amid looming easing by the Fed.
The dollar index versus a basket of six major currencies was nearly flat at 96.924 after edging up 0.13% the previous day.
The Australian dollar was almost unchanged at $0.7037 after gaining about 0.3% the previous day, getting a lift from Chinese economic data which either matched or beat market forecasts.
The Aussie is sensitive to the economic fortunes of China, Australia’s largest trading partner. (Reporting by Shinichi Saoshiro Editing by Jacqueline Wong & Kim Coghill)